How are debts divided after separation? It is an important question when working out a property settlement, particularly where a couple has a mortgage, credit cards, personal loans, tax debts or other financial liabilities.
A common misconception is that a debt belongs solely to the person whose name it is in. While legal responsibility to a lender is important, Australian family law takes a broader approach when determining how property should be divided after separation.
Debts are generally considered alongside the parties’ assets as part of the overall property settlement. However, this does not necessarily mean every debt will be divided equally between the parties, or even that every debt will be included in the property pool. This is important because including a debt in the property pool effectively reduces the net assets available for division and may result in the person retaining that debt receiving a greater share of the assets to achieve their overall entitlement.
How a particular debt is treated can depend on when it was incurred, why it was incurred, who benefited from it and the circumstances surrounding the debt.
This guide explains how debts are divided after separation, what happens to joint and individual debts, and how mortgages, credit cards, tax debts and debts incurred after separation may be treated in a property settlement.
Table of Contents
Are Debts Included in a Property Settlement?
Yes.
When determining a property settlement, it is necessary to identify not only the assets owned by the parties but also their liabilities.
Common debts may include:
- home loans and mortgages
- investment property loans
- credit card debt
- personal loans
- car loans
- business debts
- tax liabilities
- loans from family members
- buy now, pay later accounts
- other secured and unsecured debts.
Generally, assets and liabilities are considered together in one property pool, to determine the parties’ overall net financial position.
For example, if a couple owns a home worth $900,000 with a mortgage of $400,000, the gross value of the property is $900,000 but the approximate equity is $500,000.
The existence of the mortgage therefore has a significant impact on the value available for division between the parties.
Are Debts Automatically Divided 50/50 After Separation?
No.
Just as assets are not automatically divided equally after separation, debts are not necessarily divided 50/50.
The way debts are ultimately treated forms part of the broader property settlement.
The circumstances surrounding a particular debt may be relevant, including:
- when the debt was incurred
- the purpose of the debt
- whether both parties benefited from it
- whether it was incurred during or after the relationship
- whether one party incurred the debt without the other’s knowledge
- whether the debt remains legally enforceable
- the parties’ overall financial circumstances.
This means two debts of the same value may potentially be treated differently depending on how and why they arose.
Does It Matter Whose Name the Debt Is In?
Yes, but there is an important distinction between your liability to a creditor and how the debt is treated in a family law property settlement.
If a credit card, loan or mortgage is in your name, the lender may continue to hold you legally responsible for that debt regardless of what you and your former partner agree between yourselves.
For family law purposes, however, the fact that a debt is solely in one person’s name does not necessarily mean it will be treated entirely as that person’s responsibility when determining the property settlement.
Similarly, a joint debt does not automatically mean the debt will ultimately be borne equally between the parties.
The circumstances in which the liability arose need to be considered as part of the overall property settlement.
What Happens to a Joint Mortgage After Separation?
The mortgage over the family home is often the largest debt separating couples have.
Separation does not automatically change the mortgage.
If both parties are borrowers, both will generally remain liable to the lender until the mortgage is refinanced, repaid or otherwise changed with the lender’s agreement.
This can create practical difficulties after separation.
For example, one person may move out of the family home while remaining legally responsible for the mortgage. Alternatively, one party may continue making all mortgage repayments while the property settlement is being negotiated.
Ultimately, the parties may agree that:
- the family home will be sold and the mortgage repaid from the sale proceeds
- one party will retain the home and refinance the mortgage into their sole name
- the mortgage will remain temporarily while other arrangements are implemented.
Importantly, a family law agreement between former partners does not itself require a bank to release someone from a mortgage. The lender will need to approve any refinancing or change to the loan. It is therefore important that a party receives advice about their capacity to refinance a mortgage to their sole name (with the refinance amount to include any additional sum that is required to make a cash payment to the other party), before entering into a legally binding property settlement agreement.
Who Pays the Mortgage After Separation?
There is no single rule requiring one particular person to pay the mortgage after separation.
The appropriate arrangement depends on the family’s circumstances.
Sometimes both parties continue contributing to the mortgage. In other cases, the person remaining in the family home pays the mortgage, or one party pays a greater proportion because of differences in income.
Who has made mortgage repayments following separation may also be relevant when the parties’ respective contributions are considered as part of the eventual property settlement.
For this reason, it is important to keep clear records of mortgage payments and other significant financial contributions made after separation.
What Happens to Credit Card Debt After Separation?
Credit card debt is another common issue in property settlements.
Where credit card debt accumulated during the relationship for ordinary family expenses, it may form part of the liabilities considered when determining the overall property settlement.
However, the circumstances surrounding the debt can matter.
For example, there may be a significant difference between debt accumulated paying ordinary household expenses and substantial debt incurred by one party after separation for their own purposes.
The Court is not required to treat every liability in exactly the same way simply because the debt exists.
What About Debts in Only One Person’s Name?
A debt being in one person’s name does not necessarily determine how it will be treated in a property settlement.
Consider a personal loan taken out solely in one spouse’s name to pay for renovations to the family home.
Although only one person may be contractually liable to the lender, the loan may have been incurred for the benefit of the family and contributed to the value of an asset within the property pool.
Conversely, a debt incurred by one person for purposes unrelated to the relationship may require closer consideration.
The circumstances surrounding the debt are therefore important.
What Happens to Debts Incurred After Separation?
Separation does not necessarily create a financial cut-off point where everything incurred afterwards is automatically excluded from the property settlement.
Assets and liabilities can continue to change between separation and the finalisation of a property settlement.
However, the reason a debt was incurred after separation may be particularly relevant.
For example, post-separation debt may arise from:
- ordinary living expenses
- maintaining the family home
- legal expenses
- business operations
- supporting children
- purchasing a new vehicle
- personal spending.
Whether and how a post-separation debt should be taken into account will depend on the circumstances.
What If My Ex Runs Up Debt After We Separate?
This is a common concern.
If a debt is solely in your former partner’s name, that does not ordinarily make you contractually liable to the creditor simply because you were previously in a relationship.
However, if you have joint credit facilities, joint loans or supplementary cards, your position may be different.
It is therefore sensible after separation to understand exactly which financial facilities remain open and who has access to them.
For family law purposes, substantial debts incurred by one party after separation may also need to be considered when negotiating the final property settlement.
The treatment of those debts will depend on factors including why they were incurred and whether they benefited the parties or were incurred for one person’s individual purposes.
What Happens to Joint Credit Cards and Loans?
Separation does not automatically close joint financial facilities.
If both parties remain borrowers on a loan, they may both continue to have obligations to the lender.
Similarly, continuing access to joint credit facilities can create problems if additional debt accumulates after separation.
Practical steps following separation may therefore include reviewing:
- joint credit cards
- redraw facilities
- lines of credit
- personal loans
- offset accounts
- joint bank accounts.
Before closing or changing financial facilities, however, it can be sensible to obtain advice, particularly where significant assets, mortgage arrangements or business finances are involved.
What Happens to Tax Debt in a Property Settlement?
Tax liabilities can form an important part of the overall financial position.
This may include:
- personal income tax liabilities
- capital gains tax liabilities
- company tax debts
- GST liabilities
- amounts owed to the Australian Taxation Office.
The treatment of tax debt will depend on the circumstances, including whether the liability has already arisen and its connection to the assets or activities of the parties.
Potential future tax liabilities may require particular consideration, especially where businesses, investment properties or other assets with taxation consequences are involved.
Professional accounting or taxation advice may therefore be required alongside family law advice in more complex property settlements.
What Happens to Business Debts After Separation?
Where one or both parties own a business, identifying the true financial position can be more complicated.
A business may have liabilities such as:
- commercial loans
- equipment finance
- tax liabilities
- employee entitlements
- director loans
- trade creditors
- leases.
These liabilities may affect the value of the business and, in turn, the overall property pool.
Where the business is significant or its financial structure is complex, an independent business valuation or advice from an accountant may be required before meaningful property settlement negotiations can occur.
What About Loans From Parents or Other Family Members?
Family loans can become particularly contentious after separation.
One party may say money provided by their parents was a loan that must be repaid, while the other argues that it was actually a gift.
The distinction can significantly affect the property pool.
Relevant considerations may include whether:
- there is a written loan agreement
- repayments have previously been made
- interest is payable
- there is a repayment date
- the lender has previously sought repayment
- the parties treated the money as a genuine loan during the relationship.
Simply describing money as a “family loan” does not necessarily determine how it will ultimately be treated.
For more information, read our article on this topic: My parents lent me money. Is it treated as a gift or a loan?
What If One Person Created Most of the Debt?
This is where the circumstances surrounding the debt become particularly important.
Under the Family Law Act, the Court can consider liabilities incurred by either or both parties, including the nature of those liabilities and the circumstances in which they were incurred.
This means the existence of a debt does not necessarily mean it will simply be deducted from the property pool and effectively shared between the parties.
For example, suppose one party accumulates a $50,000 unsecured debt through excessive gambling without the other party’s knowledge. The Court may consider who incurred the debt, when it was incurred, why it was incurred and the circumstances surrounding it when determining how that liability should be treated.
Another example might be where one party fails to make repayments for a car, and as a consequence the car is repossessed, and that person is left with the debt alone.
This is important because including a liability in the property pool reduces the net assets available for division. Depending on the circumstances, the Court may determine that it would be inappropriate for both parties to effectively bear the financial consequences of a particular debt.
The Family Law Act also expressly allows the Court to consider the effect of material wastage of property or financial resources caused intentionally or recklessly by a party. Excessive gambling is one example of conduct that may potentially be relevant.
You can read more about these changes in our article What is the Family Law Amendment Bill 2024?
What About Gambling Debts or Reckless Spending?
Gambling losses and significant reckless expenditure can raise difficult issues in property settlements.
Where one party has substantially reduced the property pool through gambling or other conduct, the circumstances may be relevant to how the Court assesses the parties’ contributions and the overall property settlement.
However, Australian family law does not simply reimburse one party dollar-for-dollar whenever the other has spent money unwisely.
The nature, extent and circumstances of the expenditure need to be considered within the context of the relationship and the overall property settlement.
Can My Ex Make Me Pay Their Debt?
Not necessarily.
There are two separate questions:
- Are you legally liable to the creditor?
- How should the debt be treated between you and your former partner in the property settlement?
If you did not sign or guarantee a loan, you may not be personally liable to the lender.
However, the liability may still be relevant when determining the parties’ overall financial position for family law purposes.
Conversely, if you are jointly liable for a debt, an agreement between you and your former partner does not necessarily prevent the creditor from pursuing you if repayments are not made.
This distinction is particularly important when negotiating who will ultimately assume responsibility for particular debts.
Can One Person Take Responsibility for a Debt in the Property Settlement?
Yes.
A property settlement does not necessarily require every asset and liability to be divided physically between the parties.
Instead, the overall settlement may allocate particular assets and debts to each person.
For example, one party may retain the family home and take responsibility for refinancing the associated mortgage, while the other receives different assets.
The important issue is the overall effect of the settlement rather than whether every individual asset and debt is divided equally.
Example: Dividing Assets and Debts After Separation
Consider a separating couple with the following financial position:
- Family home: $900,000
- Mortgage: $400,000
- Savings: $80,000
- Superannuation: $300,000
- Credit card debt: $20,000
Their gross assets total $1,280,000, but they also have liabilities of $420,000.
Their approximate net property pool is therefore $860,000.
This does not mean each party automatically receives $430,000.
The Court would still need to consider the relevant family law principles, including the parties’ contributions, their future circumstances and whether the proposed overall outcome is just and equitable.
The example simply demonstrates why debts cannot be considered separately from assets when determining the overall financial position.
Can We Agree Between Ourselves Who Pays the Debts?
Yes.
Separating couples can often negotiate how particular liabilities will be dealt with as part of their overall property settlement.
For example, they may agree that:
- one party will refinance the mortgage
- one person will repay a particular credit card
- joint debts will be paid from the proceeds of selling an asset
- certain liabilities will be offset against assets retained by one party.
However, an agreement between former partners does not necessarily alter their contractual obligations to a bank or other creditor.
If both names remain on a loan, the lender may continue to regard both people as responsible until the loan is refinanced, repaid or the lender formally agrees otherwise.
For this reason, the practical implementation of the agreement is just as important as deciding who should ultimately be responsible for the debt.
Frequently Asked Questions
Are debts split 50/50 in a divorce?
No. There is no automatic rule requiring debts to be divided equally after divorce or separation. Debts are considered as part of the overall property settlement and their treatment depends on the circumstances.
Am I responsible for my ex’s credit card debt?
Not necessarily. Your liability to the credit card provider depends on the contractual arrangements. However, the debt may still be relevant to the overall family law property settlement.
Does debt in my name stay with me after separation?
Not automatically for property settlement purposes. The Court may consider why the debt was incurred and the circumstances surrounding it when determining the overall property settlement.
What happens if my ex increases our joint debt after separation?
You should obtain advice promptly if joint credit facilities are being used after separation. Your contractual liability to the lender and the treatment of the additional debt in your property settlement are separate issues.
Can debts incurred after separation be included in a property settlement?
Yes, potentially. There is no automatic rule excluding every liability incurred after separation. The reason for the debt and the circumstances in which it arose may be relevant.
What happens to the mortgage if one person keeps the house?
The person retaining the home will commonly need to refinance the mortgage into their sole name. This requires approval from the lender and should be addressed when structuring the property settlement.
Key Takeaways – How Debts are Divided after separation
When considering how debts are divided after separation, it is important to look beyond whose name appears on the account or loan.
The key points are:
- Debts are generally considered alongside assets when determining the parties’ overall financial position.
- Debts are not automatically divided 50/50.
- A debt in one person’s name may still be relevant to the property settlement.
- Joint borrowers may remain legally liable to a lender even if they agree between themselves that one person will pay the debt.
- The circumstances in which a debt was incurred can be important.
- Debts incurred after separation are not automatically excluded.
- Mortgages, business debts, tax liabilities and family loans can require particular consideration.
- Properly documenting and implementing the final property settlement is important.
Understanding the Broader Property Settlement Process
To understand how assets and liabilities are considered as part of the broader property settlement process, read our guide How Does the Property Settlement Process Work?
You may also like to read our article: Protect your assets and your family after separation.
Getting Advice About how debts are divided after separation
Debts can significantly affect the outcome of a property settlement, particularly where there are substantial mortgages, business liabilities, tax debts or disagreements about debts incurred by one party.
Understanding both your obligations to creditors and how liabilities may be treated under family law is important before agreeing to a property settlement.
At Barton Family Lawyers, we regularly assist clients with property settlements involving mortgages, personal debts, businesses, tax liabilities and complex financial arrangements. We can help identify the assets and liabilities relevant to your property settlement, advise you about your legal position and negotiate an appropriate resolution as to how debts are divided after separation.
If you require advice about how debts are divided after separation, contact Barton Family Lawyers to arrange a reduced-rate initial consultation with one of our experienced Brisbane family lawyers.
